Transcript Introduction - University of Michigan

Chapter 14 Trade Policies for Developing
Countries
Link to syllabus
Fig. 14.1 page
318.
Growth Rates
of GDP &
GDP/capita
W. Arthur Lewis, 1915-1990
Born St. Lucia (Caribbean)
Educated at LSE
Taught at U. of Manchester, under Hayek,
and at Princeton
Adviser to the UN, gov’t of Ghana,
Nobel Prize, 1979
“Economic Development with Unlimited
Supplies of Labor” 1954
Trade Policy Alternatives for Developing Countries (p. 319)
• Focus on exporting primary products
• Attempt to raise the world prices of
primary products that are exported
• Protect and encourage new industries that
produce products sold into the local
market
• Encourage new industries that produce
products that are exported
Raúl Prebisch, 1901 - 1985
Born in a province of Argentina. Parents were
German immigrants. Studied at University of
Buenos Aires, where he later taught. During the 1930s
he moved from classical orthodoxy to a form of
Keynesianism. In 1948 he was the first director of ECLA,
[CEPAL] and in 1950 promulgated what became known as
the Prebisch-Singer hypothesis, which argued against free
trade because of an alleged trend toward falling terms
of trade for raw materials. Although he is said to
have favored ISI, he was often critical of its excesses.
From 1964-1969 he led UNCTAD, a UN body that
worked for Third World countries.
Why Declining Terms of Trade?
1) Engel’s Law – that as incomes grow, people spend less on food
2) Increased supply with growth of what were called LDCs
3) Technological change, generated in developed countries, to
their own advantage:
New products that require less raw materials
4) There was a significant amount of hostility to MNCs and to the
industrial countries, who were accused of biasing trade to their
favor. [mt: not real logical, but that’s what people thought]
5) Protectionist policies in the industrial countries, which would
typically reduce demand for LDC exports.
very evident in the 1930s.
Why not Declining Terms of Trade? pp. 324-25
Fixed amount of raw materials – especially hydrocarbons
Slow productivity growth in raw material sector
Many developed countries export raw materials
High technological change in manufactured products from D.C.’s
Eventually, many third world countries successfully broke into
exporting manufactured goods. Prebisch and co. didn’t foresee that
Figure 14.2 page 325
Relative price of
primary products
Import Substituting Industries (pp. 333-)
Potential strengths
• Infant industries can grow up
• Developing government can get much-needed revenue
• The country’s international terms of trade can improve
• Information on demand is acquired cheaply
Actual experience
• Deadweight losses from resource misallocation
• Developing countries practicing or adopting freer-trade
policies grow more quickly
mt believes that Pugel exaggerates the failure of ISI, in Latin America
and elsewhere, but it is undeniable that ISI is now out of favor.
Figure 14.3 page 329. Cartel as profit maximizing monopoly
EYE ON THE PAST
P. 369
Bade/Parkin
Oil Price Cycles in the U.S. and Global Economies
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Erosion of Cartel Power (p. 330)
• Declining demand as buyers respond by switching
to substitutes
• Increasing responsiveness of competing supply
from non-cartel producers
• Declining share of the cartel’s production in the
world market
• Cheating by the cartel members
U.S. Petroleum Production, Consumption, Imports
Figure 14.4 page 337
Changing mix of exports from LDCs
Figure 13.5
page 331
Trade reform in
Transition
economies
Different text